Insurance and savings trade body the ABI has warned the Department for Work and Pensions (DWP) that a public pensions 'consolidator' must avoid undermining the DB scheme buyout market.

Responding to a consultation from the DWP on changes to DB pension schemes, the ABI warned that proposed changes could have negative impacts for scheme members.

The DWP is currently seeking views on the introduction of a public sector DB scheme consolidator to be operated by the Pension Protection Fund. It is also exploring making surplus extraction easier for well-funded DB schemes, enabling schemes to invest surpluses elsewhere.

The ABI stressed that the DB scheme buyout market was thriving and questioned why taxpayers should have to underwrite or take on the risk of private sector DB schemes.

According to ABI data, over 80% of schemes are now in surplus and will be able to access commercial options to secure future pension payments either now or in the future.

Bulk annuity sales by insurers reached a record £49.3bn last year, with insurers securing the retirements of 407,000 people - nearly three times as many people as in 2022.

Yvonne Braun, director of long-term savings at the ABI, said: “The UK pension insurance sector provides guaranteed, life-long pension payments to scheme members which fully reflect the promises made by their employers. This competitive and thriving sector is also critical for the government to meet its productive investment goals, as insurers invest in highly productive assets across the economy.

“While the intention for a public consolidator is to target only pension schemes which are not commercially viable, this is only a small minority of schemes. These underfunded schemes without a strong employer covenant should be the target market for a public sector consolidator to ensure that the pension insurance market is not undermined. Even then, great care would be needed to guard against wider scope creep and letting employers with well-funded schemes off the hook from meeting their long-standing pension promises.”

The trade body also highlighted the need for great caution on surplus extraction and warned the proposals run the risk of negative consequences for scheme members and disappointing the Government’s productive finance aspirations.

The Government believes that relaxing the rules on surplus extraction may encourage pension schemes to push more long-term investment into private assets, delivering a boost to the economy. However, the absence of rules around how employers may use surpluses means employers could use these additional funds for share buy-backs and dividends, rather than the productive investments intended by the Government.

The ABI warned that extracting surpluses would also mean that trustees would have less capital to invest and could lead to them being more risk averse when setting investment strategies.